Question

Entries for Bonds Payable and Installment Note Transactions

The following transactions were completed by Montague Inc., whose fiscal year is the calendar year:

Year 1
July 1.	Issued $7,800,000 of five-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 10%, receiving cash of $7,498,854. Interest is payable semiannually on December 31 and June 30.
Oct. 1.	Borrowed $170,000 by issuing a 10-year, 8% installment note to Intexicon Bank. The note requires annual payments of $25,335, with the first payment occurring on September 30, Year 2.
Dec. 31.	Accrued $3,400 of interest on the installment note. The interest is payable on the date of the next installment note payment.
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $30,115 is combined with the semiannual interest payment.
Year 2
June 30.	Paid the semiannual interest on the bonds. The bond discount amortization of $30,115 is combined with the semiannual interest payment.
Sept. 30.	Paid the annual payment on the note, which consisted of interest of $13,600 and principal of $11,735.
Dec. 31.	Accrued $3,165 of interest on the installment note. The interest is payable on the date of the next installment note payment.
Dec. 31.	Paid the semiannual interest on the bonds. The bond discount amortization of $30,115 is combined with the semiannual interest payment.
Year 3
June 30.	Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $180,688 after payment of interest and amortization of discount have been recorded. (Record the redemption only.)
Sept. 30.	Paid the second annual payment on the note, which consisted of interest of $12,661 and principal of $12,674.

Required:

1. Journalize the entries to record the foregoing transactions. For compound transactions, if an amount box does not require an entry, leave it blank or enter "0". When required, round your answers to the nearest dollar.

Date Account Debit Credit Year 1 July 1 Cash 7,498,854 Discount on Bonds Payable X x 301,146 x 7,800,000 Bonds Payable Oct. 1 Cash ✓ 170,000 Notes Payable 170 170,000 ✓ Dec. 31-Note Interest Expense 3.40 3,400 Interest Payable 3,400 Dec. 31-Bond Interest Expense Discount on Bonds Payable Cash Year 2 June 30 35,100 X Interest Expense Discount on Bonds Payable Cash ✓ 35,100 X Sept. 30 Interest Expense ✓ 11,735 x 3,400 Interest Payable Notes Payable 10,400 x Cash ✓ 25,535

Answer 1

Journal entries for the given transaction

date	entry	amount Dr ($)	Amount ($) CR
year1 (july 1)	cash A/c    Discount on Bonds Payable A/c To Bonds Payable	7498854 301146	78,00,000
	( Being 9% Bonds issued on discount )
oct 1	Cash A/c To Notes Payable A/c	170000	170000
	( Being amount borrowed from bank for 10 years)
31 dec	Interest Expense A/c To Interest Payable A/c	3400	3400
	( Being Interest Accured on installment note )
31 dec	Interest Expense A/c To discount on bonds Payable A/c To cash A/c	381115	$30115 $351000
	( being interest paid on bonds )
year 2 june 30	Interest Expense A/c To discount on bonds Payable A/c To cash A/c	381115	30115 351000
	( being interest paid on bonds )
sep 30	interest expense A/c interest payable A/c notes payable A/c To cash A/c	10200 3400 10400	25535
	( Being Installment Paid on borrowed Money)
31dec	interest Expense A/c To Interest Payable A/c	3165	3165
	( Being Interest Accured on installment note )
31 dec	Interest Expense A/c To discount on bonds Payable A/c To cash A/c	381115	30115 351000
	( being interest paid on Bonds)
Year 3 june 30	Bonds Payable A/c Loss on Redemption of Bonds A/c To Discounts on Bonds Payable A/c To Cash A/c	7800000 54801	210801 7644000
	( Being bonds are redeemed @98)
sep 30	Interest Expense A/c Interest Payable A/c Notes Payable A/c To Cash	9496* 3165 12674	25335
	( Being second installment of bank paid

* Total interest paid =12661

Interest payable which was accured = 3165

so interest expense = 12661-3165

=9496

Calculation of bonds Redemption

as discount on bonds =301146

so semi annual discount amortised =30115

total discount amortized till last day of redemption= 30115*3= 90345

amount left to amortised = 301146-90345

=210801

Bonds redmeption value = 7800000*98%

=7644000

discount on bonds left to be amortized = 210801

bonds payable = 7800000

so loss on redemption = 7800000-210801-7644000

= $540801

total Amount of interest expense in year 1=3400+381115= 384515

in year 2=381115+10200+3165+381115=775595

Carrying value of bond on december 31

Bonds payable = 7800000

discount amortised =30115*3=90345

Discount unamortised = 301146-90345

=210801

carrying value as year 2 on 31 dec= 7800000-210801

=$ 7589199